Medigap vs. Medicare Advantage

Like any massive insurance enterprise, Medicare can be confusing. Luckily, the basics of the program aren’t that difficult to grasp. At the same time, as the old cliché goes, the devil is in the details.

Medicare has four basic parts: A, B, C, and D. Taken together, Parts A (hospital care), B (doctors, medical procedures, equipment), and D (prescription drugs) provide basic coverage for Americans 65 and older. The issue is often with health care costs that are not covered—such as deductibles, co-pays, and other medical expenses—which could wipe out your savings should you become seriously ill.

Key Takeaways

  • Medigap and Medicare Advantage both protect against bills for health care costs Medicare doesn't cover.
  • Medicare Supplement Insurance, also called Medigap coverage, charges a premium in addition to what the person already pays for Medicare Parts A, B, and D.
  • With a Medicare Advantage Health Plan (Medicare Part C), a patient enrolls through a private company that usually covers what's in Parts A, B, and D.
  • When signing up for an Advantage plan, the subscriber pays the Medicare Advantage premium and the Part B premium.

That's where Part C comes in. Also known as Medicare Advantage, it's one of two ways to protect against the potentially high cost of an accident or illness. Another option is Medicare Supplement Insurance, also called Medigap coverage. However, while Medicare Advantage and Medigap both help cover expenses that are not covered by basic Medicare, there are important differences between the two plans.

Medigap

Medicare Supplement Insurance, or Medigap, protects people who buy traditional Medicare against many of the additional costs a patient might pay. In return, Medigap charges a premium in addition to what the person already pays for Medicare Parts A (many people get this free), B, and D.

Just to make life truly confusing, the various options offered by Medigap are also sorted by letter: Plans A, B, C, D, F, G, K, L, M, and N. Medicare standardizes what these plans can include. The cost for them can vary, however, so it's worth shopping around.

Joseph Graves, insurance agent and founder of I Hate Buying Insurance, says many people enroll in Plan F—the most expensive choice—because it covers nearly all the gaps. A person with Plan F coverage will have few or no out-of-pocket expenses. However, after 2019, plan F will no longer be available to new Medicare recipients.

Medicare Advantage

A Medicare Advantage Health Plan (Medicare Part C) may provide more help at a lower cost than traditional Medicare plus Medigap. Instead of paying for Parts A, B, and D, a person would enroll through a private insurance company that, in many cases, covers everything provided by Parts A, B, and D and may offer additional services. In most cases, the beneficiary pays the Medicare Advantage premium along with the Part B premium.

Medicare Advantage Health Plans are similar to private health insurance plans. With most, services such as office visits, lab work, surgery, and many others are covered after a small co-pay. Depending on what’s available regionally, plans could offer a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO) network plan and place a yearly limit on total out-of-pocket expenses.

Also, like private plans, each has different benefits and rules. Most provide prescription drug coverage. Some may require a referral to see a specialist while others won’t. Others may pay some portion of out-of-network care, while others will only cover doctors and facilities that are in the HMO or PPO network.

Medigap vs. Medicare Advantage Example

Let's say a patient only has Parts A, B, and D. Here are what the holes or “gaps” in coverage would cost if a patient with Medicare were admitted to the hospital for, say, heart surgery, and complications required a long hospital stay followed by needing regular medication after it:

At the hospital: Because of the Part A deductible, the patient pays the first $1,364. After 60 days, they would start paying a portion of each day's cost.

For doctors and medical procedures (Part B premiums) at the hospital and at home, the patient pays 20% of all costs after meeting the $185 deductible. Unlike many other health insurance policies, there is no cap or maximum out-of-pocket amount on what a person could owe. The American Heart Association says that the minimum cost of bypass heart surgery is $85,891, in which case, the Part B co-pay could be over $17,000.

Because of how Medicare Part D works and depending on income, a patient could pay between 35% and 85% of the cost of some of their prescription drugs if they need enough medication to push them into the notorious doughnut hole, when Part D's full prescription-drug coverage runs out after a person has spent $3,750 until their medication costs exceed $5,000 per year. (In 2019, coverage will end at $3,750 and begin again at $5,000.) During the coverage gap, the patient is responsible for 25% of covered brand-name prescription drugs.

Medigap policies will cover you whenever you see any doctor or facility that takes Medicare. If the doctor or facility does not accept Medicare patients, Medigap won't cover any of those costs, even though it is a private insurance policy.

These coverage gaps mean that a particularly bad health year could leave a patient with tens of thousands of dollars in hospital bills. That's why most people purchase Medicare supplement insurance, also called Medigap, or enroll in Part C, a Medicare Advantage Health Plan.

Both options are offered by private insurance companies. However, the private insurance companies must follow Medicare guidelines regarding what they are allowed to sell.

Key Differences

It is illegal for an insurance company to sell you both a Medicare Advantage and a Medigap policy. That is, if someone has Medicare Advantage, it is illegal for a private insurance company to try to sell them Medigap coverage. Three things to consider before choosing which one to get:

Cost: Medigap coverage usually has a higher monthly premium, but could result in lower out-of-pocket expenses than some Medicare Advantage plans. Medicare Advantage plans, on the other hand, generally cost less and cover more services, which can be the better option for your budget.

Choice: Medicare Advantage plans generally limit you to the doctors and facilities within the HMO or PPO, and may or may not cover any out-of-network care. Traditional Medicare and Medigap policies cover you if you go to any doctor or facility that accepts Medicare. If you require particular specialists or hospitals, check whether they are covered by the plan you select.

Lifestyle: Medicare Advantage plans often only operate within a certain region. If you’re a snowbird living in more than one state throughout the year, traditional Medicare plus Medigap is probably a better choice than an Advantage plan. This may also be true if you travel frequently because, while some Medigap plans provide coverage when traveling outside of the United States and cover you in all 50 states, Advantage plans generally do not.

Special Considerations

Figuring out the Medicare plan that's most appropriate for your needs is probably not a do-it-yourself activity. Once you understand the basics of Medicare, get some help.

Medicare.gov provides tools that will allow you to compare plans, but the decision can be complicated. Insurance agent Graves recommends that you “work with a licensed insurance agent who can show you both Medicare Supplement Plans and Advantage Plans from multiple companies. Each type has its positives.”

The questions to cover, he says: “You need to understand the costs, doctor networks, coverage levels, and maximum out-of-pocket for each. Enroll in what suits your situation best.” Organizations such as Consumer Reports and the Medicare Rights Center can also help you research your decision. And you can also compare plans by going to Medicare.gov’s plan finder.